10/22/2011

Saturday Oil Report -- October 22, 2011

In my previous Saturday report I predicted oil prices would continue to fall, but they went the other way. The Nymex price stands at $87.40/barrel, with Brent at $110.78. All western markets continue to rise or fall depending on the mood that day about how the European Debt Crisis will get resolved. Tomorrow (the 23rd) is supposed to be a Big Day, so we'll just have to wait and see what new developments this endless melodrama holds in store.

Why doesn't the EU just shoot itself in the head and put themselves (and us) out of their misery?

There's no reason to change the alarm level.

Oil Alarm Level —Yellow

The Brent benchmark is rising in part because European crude stocks are at a multi-year low. The Financial Timesreported on the IEA's data—

European oil stocks have plunged to their lowest in almost nine years after a wave of supply disruptions, the International Energy Agency said on Wednesday, a finding that explains the recent strength of Brent crude.

The western countries’ oil watchdog said that European stocks fell in August, the latest month for which data are available, to less than 310m barrels, the lowest level since February 2003, due to a series of “supply-side factors”. These included the loss of Libyan supplies, North Sea production outages, pipeline sabotage in Nigeria and “the gradual redirection of Russian crude flows towards Asia”.

Since so much of the oil the United States imports is based on the Brent price, these "supply-side factors" are affecting the cost of refined products here and the trade deficit. Calculated Risk reports that the average price of a barrel of imported oil was $102.62 in August, down from $104.27 in July.

Tight supply promises to keep oil prices relatively resilient in 2012, even if world GDP actually contracted, so say a handful of industry analysts at Barclays Capital in London...

“Even in the worst case scenario, the downside to oil prices is unlikely to be anything as severe as during the 2008-2009 cycle,” Barclays analysts Roxana Molina and Amrita Sen wrote in a report published Tuesday. “As a result, we maintain our price forecast of $115 per barrel for Brent in 2012 and expect $90 per barrel to hold as a sustainable floor even under gloomy macroeconomic conditions.”

Barclays based its forecast on four different economic scenarios. Their best case forecast of 3.7% GDP worldwide 2012, all the way down to a worst case 1.8% contraction... Global oil demand growth in a best case scenario will average around 1.27 million barrels a day, while under the worst case scenario of a global recession decline by around 750,000 barrels daily. In the mid range, where growth is forecast to be between 1.2% and 2.2%, [increased] oil demand is seen averaging between 700,000 to 400,000 barrels a day.

The supply side of the oil market is far weaker today than it was in 2008, Barclays says. So far, even as demand has moderated, supply (total OPEC and non-OPEC) has fallen faster, resulting in substantial inventory drawdowns through the year. According to the latest International Energy Agency data for August, OECD inventories were around 25 mb below their five-year averages, placing those countries in a tighter spot than they were in 2008, when countries had abundant oil based on the perceived notion that their economies were going to keep on booming.

If the best case (3.7% global GDP growth) forecast occurs, which is unlikely, it looks like an oil price shock is in the cards next year. Inventories are already low and falling. On the other hand, the global economy might actually contract next year, leading to a decrease in oil demand of 750,000 barrels per day. The only thing we know for sure about the short-term future is that we can't predict it.

Where will prices be in two weeks? Who knows? Global markets are too unstable to hazard a guess.

We've had a credit squeeze for some time but oil prices keep going up. And this isn't really supply and demand any longer; general world demand is going down but prices go up anyway. What about the speculation factor?